Other Employee Benefits - Fringe Benefits
A fringe benefit is a form of compensation for services performed. The extent of such benefits offered is both a function of the employee make-up and employer resources. The offer of such benefits is an attractive employee retention tool and tax saving device. Listed below are the most common types of fringe benefits.
- Accident and Health Benefits: Premiums paid by the employer for accident, health and disability insurance policies are deductible to the employer and excluded from the employee's gross income. Insurance benefits paid are included as income, save for those received for medical care of the employee, spouse and dependents; those for permanent loss or loss of the use of a member or function of the body or permanent disfigurement of the employee, spouse or dependent.
- Athletic Facilities: the value of the facility and its use provided by the employer is not taxable to the employee. However, if an employer pays dues to a private health club for the employee's use, then those dues are taxable compensation to the employee.
- De Minimis Benefits: as their name implies, their value is so small that it would be impractical for the employer to account for them. In consequence, they are not taxed to the employee. An example of such a benefit would be the use of office facilities such as a facsimile machine or computer.
- Dependent Care Assistance: money that the employer pays for dependent care to enable its employees to work is excluded from income up to $5,000 annually. Such arrangements must be nondiscriminatory.
- Educational Assistance: an employer can offer a certain amount of such assistance (undergraduate or graduate level) tax-free to the employee. The annual limit is $5,250.
- Group-term Life Insurance Coverage: premiums for $50,000 or less of group term per employee paid by the employer is excluded from the employee's gross income. Amounts exceeding $50,000 are taxable under Section 79 cost per $1,000 of coverage.
For example, Paul Orahilly is 47 years old and covered under an employer group term policy for $300,000. The employer foots the entire cost of coverage. The annual premium is $10 per $1,000 of coverage. Under this scenario, Paul's taxable income is computed as follows:
$300,000 - $50,000 (nontaxable) = $250,000 x $10/$1,000
= $250,000/$1,000 = 250 x 10
= $2,500 included in gross income
- Lodging on One's Business Premises: this sort of arrangement is designed to benefit the employer. The value of such lodging and accompanying meals is excluded from the employee's income so long as the employer provides them on its premises and for its benefit only. Additionally, the employee accepts this lodging as a condition of employment. An example would be a hotel manager who needs to be available as a requirement of employment. The value of room and board in this situation would not be taxed to the employee.
- Meals: please refer to the 'lodging on one's business premises' example above.
- Moving Expense Reimbursements: the employer's outlay of moving expenses to bring in an employee would not be taxable income to that employee.
- No-Additional Cost Services: if the employer offers to its employees the same services that it does to customers at little or no additional cost or lost revenue, the value of such services is not taxable to the employee (e.g. travel privileges to employees of a commuter rail or dining privileges of restaurant employees). Such plans may not discriminate in favor of key employees who would otherwise be denied the tax benefits of these services.
- Transportation (Commuting) Benefits: not taxable, the benefit is designed to encourage the use of public transportation to get to work. The employer would pay for a commuter pass (to use metro, rail and bus services) and parking. The exclusions are limited.